All-Time Highs, Recessions, and Long-Term Investing
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With major stock indices at record highs, some investors are asking, ‘Is now the time to pull back?’ In this podcast we dive into the numbers, address recent market movements, and explain why a long-term perspective remains essential.
Key discussion points:
Market Milestones in 2024
51 all-time highs, the Dow at 44,000, and the S&P 500 above 6,000
What Happens After All-Time Highs?
Looking back: Discussion of all-time highs and historical growth over time.
The Recession Question: Is It on the Horizon?
Low unemployment, continued economic growth, and the Fed’s rate cuts lead us to believe we won’t see a recession in the near term.
Why Long-Term Investment Is Key
It can be a bumpy road to the long-term average. Setting aside short-term investments to cover immediate needs, so that long-term investments can weather market downturns
Charts and Graphics
Transcript:
Over the last year, we have seen several market indices hitting all-time highs. The Dow, Nasdaq and S&P 500 have all seen well above average gains in 2024, with the recent post-election rally marking another round of new highs. The Dow closed above 44,000 for the first time and the S&P 500 also had its first close above 6,000. This marks 51 all-time highs on the S&P 500 as of Tuesday.
The Federal Reserve cut interest rates by a quarter point on November 7th to a target rate of 4.75%. The Fed said, the Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.
Market uncertainty related to US elections is behind us.
Let’s now look at a couple topics that have come up in recent conversations: If we are at all-time highs, will the market go down? Is there a recession on the horizon? All good questions. Let's get into them.
As we mentioned, the S&P 500 has hit an impressive 51 all-time highs in 2024. This means that at all-time high numbers 48, 49, and 50 the best course would have been to stay invested. Let’s zoom out and look at stock markets over 5-year periods. What history tells us is that investing at all-time highs or at any other day has produced nearly the same positive result. Being invested over a duration of at least 5 years generally yields gains.
So, will the market cool? What we know is that the long-term average return of the S&P 500 is around 10% per year. The last 3 years individually have not been average. 2022 was lousy, and 23 and 24 were big up years. One bad year, followed by 2 good years. Add it all up, and no surprise we are right back at 10% annualized.
Looking forward, we can’t say if, when or how the market will find its way back to the average. It can be a bumpy road to the long-term average. We believe staying invested in the stock market with long-term money is prudent.
As for recessions, we are not seeing the typical markers of a recession. We continue to see economic growth, US unemployment is low, and short-term interest rates have been coming down. We should note recessions are backward looking and are defined as a period of economic decline that affects the entire economy and lasts more than a few months.
At Vector, we build our client portfolios around the idea of allocating short-term bonds and cash-like investments for near term income needs. This tends to cover 2-3 years, so that when a period of stock market decline comes our way, we are prepared for it. In addition, Vector is constantly reviewing the investments of our clients to ensure they are on track with the investment plan that we created together.
We are reminded of the bumpy road meme with the biker expecting an unobstructed up and to the right line. A constant effort and an expectation of easy mode. But the truth is more complicated. The road has always been bumpy and full of unknowns. We lean on historical averages to tell or shape our expectations. But those averages are not the whole truth at any given moment.
To wrap up this episode, we’ll summarize that all-time highs can be followed by new all-time highs. It happens all the time. 51 times this year. Recession indicators are not blinking. The Fed has been cutting interest rates which historically has been a tailwind for stock markets. Despite all this, we acknowledge that markets can be bumpy on their way to the long-term average. At Vector, we prepare for this, and we have been for years.
These discussions aim to spark dialogue about enhancing retirement readiness and making more informed financial decisions. At Vector, we delve into the nuances of scenario planning, offer insights and guidance tailored to each client's unique circumstances. If you or someone you know is pondering their financial future or seeking clarity on their retirement plan, we're here to help.
This discussion is with Vector’s Jason Ranallo.
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